Google Settles for $500M in Pharmacy Ad Scandal

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PROVIDENCE, R.I. (AP) — Google Inc. has agreed to pay $500 million to settle a U.S. government investigation into the Internet search leader's distribution of online ads from Canadian pharmacies illegally selling prescription and non-prescription drugs to American consumers, a U.S. attorney in Rhode Island said Wednesday.

The settlement means the Internet search leader will not face criminal prosecution for accusations that it improperly profited from ads promoting Canadian pharmacies that illegally imported drugs into the United States, U.S. Attorney Peter F. Neronha said.

"It sends a clear message to both Google and to others that contribute to America's pill problem that they will be held to account for endangering the health and safety of the residents of this district and to persons all across the United States," said Neronha, who described the settlement as one of the largest in U.S. history.

The $500 million represents the gross revenues Google collected in ad buys from the Canadian pharmacies, plus the earnings generated from the illegal sales of drugs to American consumers, federal investigators said. The money has already been wired to a Department of Justice account, Neronha said.

Google issued a statement that it should not have allowed Canadian pharmacies to market prescription drugs to American consumers.

"We banned the advertising of prescription drugs in the U.S. by Canadian pharmacies some time ago," the statement said. "However, it's obvious with hindsight that we shouldn't have allowed these ads on Google in the first place." The company declined further comment. Google shares up slightly, trading at about $519.

Federal officials also say Google knew as early as 2003 that its ad system was allowing Canadian pharmacies to make illegal sales. These transactions included selling prescription drugs without valid prescriptions from a licensed medical practitioner at a premium, federal prosecutors said.

Shipping prescription drugs into the U.S. from abroad violates drug and other laws, investigators said. Prescription drugs shipped into the U.S. from Canada are not subject to oversight by Canadian regulatory authorities and many sell drugs from countries with inadequate pharmacy regulations, prosecutors said. A separate U.S. Food and Drug Administration investigation into drugs that claimed to be manufactured in Canada found that 85 percent of the drugs examined came from 27 different countries including that were found to be counterfeit, said Kathleen Martin-Weis, acting director of the FDA's Office of Criminal Investigations.

The probe did not touch the overseas online pharmacies, Neronha said, because American officials did not have the authority to bring charges. He said the case raised some "novel legal theories."

Investigators snared Google's ad system by creating undercover web sites offering hundreds of over-the-counter and prescription drugs to be sold without a prescription or the completion of an online medical questionnaire, Martin-Weis said. She added an undercover investigator informed Google employees creating the advertising for these products that they were manufactured overseas and did not require customers have a valid prescription.

"In each instance, despite this knowledge, Google employees created a full advertising campaign for each of the undercover web sites," Martin-Weis said.

Officials said they burned quickly through the money set aside for Google ad buys for the undercover web sites and then pored over 4 million documents to make their case.

Officials started probing Google after a suspect involved in an unrelated multi-million financial fraud was caught by authorities after fleeing to Mexico in 2006, officials said. The suspect told investigators that while on the lam be began to advertise drugs illegally on Google, Neronha said.

The investigation laid bare how vulnerable the company's automated ad system known as AdWords is to the machinations of shady operators. The ad network is a major money maker for Google and is expected to generate more than $30 billion in revenue this year.

Google acknowledged holes in its ad system in a federal lawsuit filed last fall against dozens of "rogue" online pharmacies that were finding ways to place ads for drugs despite the company's efforts to prevent abuses. The individuals identified in the complaint were in New York, Tennessee and Ohio.

In one of the more common practices, the illicit drug dealers would plug subtle misspellings of drug names frequently entered into Google's search engine to generate ads alongside the results. For instance, one illegal drug advertiser spelled the anabolic steroid Dianabol as "Diano bol" in Google's automated system to produce an ad, according to the lawsuit in San Jose federal court.

Google has obtained court orders banning some of the rogue pharmacies named in the lawsuit and is still seeking injunctions against the others.

The Google lawsuit came seven months after the Internet search leader imposed new restrictions on the kinds of pharmaceutical ads it would accept in the U.S. and Canada. The new rules were supposed to allows ads only from U.S. pharmacies that had been accredited by a special program run by the National Association Boards of Pharmacy. In Canada, the accreditation had to come from the Canadian International Pharmacy Association.

Google's critics have complained in the past that the company and other websites haven't been vigilant about policing pharmaceutical ads because they are so lucrative. Drug and health care advertising generated about $1 billion in Internet spending last year and is expected to grow to nearly $1.9 billion by 2015, according to the research firm eMarketer Inc.

The agreement also ends speculation that began in May when the company made a reference in its quarterly filing with the Securities and Exchange Commission to a Justice Department investigation into the usage of Google's automated system for placing ads alongside search results and other content at hundreds of thousands of websites. Google had raised even more intrigue by subtracting $500 million from its first-quarter earnings to cover a potential settlement.